Lore

A town that developed on the outskirts of the Demon Ruins/Lost Izalith whose inhabitants became infected by the Blight Pus. It is likely that many of the people here became servants of Quelaag and her fair sister.

Blighttown was likely always a less than desirable place to live or work. It appears to be a sort of mining community, complete with rickety ladders and platforms. It connects to the Depths where, according to the Sewer Chamber Key, people were banished once they turned Undead:

In any community, a few bad apples are sure to exhibit insatiable greed. If they were turned Undead, and banished to the Depths, would they reconsider their ways?

The mining aspect is further supported by the platforms that hug stone walls, tunnels dug into the side of the cliff. Some Infested Barbarians drop pickaxes, and the slugs drop Titanite.

There is a possibility that Blighttown is where Titanite was discovered and/or mined, as mentioned in the Titantie Chunk description:

With the discovery of chunks in Lordran, the race to locate the Legendary Slabs has begun. But could they be mere myth?

It is also worth noting that the aquaeducts from The Depths drain their water into Blighttown. According to the Blighttown Key, even those banished to The Dephts were wary about Blighttown:

As its name suggests, Blighttown is a place of great pestilence. Even the polluted inhabitants of the Depths are aware of its dangers, and built this mighty door in hopes that they could remain safely separated.

Design Works Interview

Miyazaki: Everything had its particular shade or tone; Blighttown, for example is the rawest, most disgusting area in the game, but looking at the area as a whole, I wanted it to both possess a deep sadness and feel bitterly cold, that's the atmosphere I tried to build on.

Miyazaki: As for Blighttown, I started with a number of images that I wanted to incorporate, but due to the complexity of the area, it would have been difficult to try and design all at once, so instead we began with large features like the water wheel elevator and, with the designers and artists, gradually built the area up from there.

Miyazaki: The Catacombs and the Tomb of the Giants have a similar atmosphere to that of Blighttown but both contain a great many more man-made objects, which meant more work for the artists. In our team, the 3D artists would sometimes be called upon to do work more akin to that of a traditional artist, because we tried to utilise their skills as much as we possible. As I said before we don't have many artists to work with and just throwing more people at something doesn't guarantee a better result.